Britain's financial services watchdog is looking to shut down UK Land Investments (UKLI), the country's largest "landbanking" company, which has been the subject of Guardian Money warnings.

This will leave 4,500 investors with slices of virtually worthless farmland. It now appears that many might have avoided losses if the Financial Services Authority had listened to fraud squad requests to shut it down in 2005.

The FSA will ask the high court to wind up UKLI for operating as an illegal "collective investment scheme", thereby denying investors protection. The FSA says investors poured £69m into the firm, which sold small plots of "selected" farm land, claiming it could get planning permission for housing so the site would soar in value.

Investors are unlikely to get anything back from the liquidation as almost all the cash was soaked up in commissions and payments to directors and shareholders. But Guardian Money can reveal that fraud specialists at the City of London police were convinced UKLI was operating against the public interest when it first probed the Mayfair-based firm three years ago.

According to those close to the investigation, the City of London police suspected UKLI of dishonesty in the way it presented its "expertise" to investors and in how it said they would be able to multiply their money many times with little, if any, risk.

The fraud squad spoke to planners in Kent and Essex, but while both counties said planning permission on UKLI sites within their borders was virtually inconceivable, neither could say housing would "never, ever" be built on the sites UKLI was selling.

"There was no offence to prosecute, so the squad went to the FSA in late 2005 on the grounds this was an illegal collective investment. But the FSA said it could do nothing as landbanking was outside its reach," we were told. "There was a sense of frustration that nothing could be done when it was obvious gullible investors would lose out."

The regulator changed its stance in late 2006, but that was too late for many buyers. The firm advertised on radio - including Asian stations - and sold in India and Dubai as well as in the UK. UKLI employed a public relations company and tried to convince MPs, including Leeds Liberal Democrat Greg Mulholland, of its legitimacy.

Although there is little money left for administrators from Deloitte to distribute, the FSA has been granted an interim freezing and restraining order against UKLI to protect its assets for creditors, including investors. But the FSA warns that the lack of authorisation means its investors are not entitled to make a complaint to the ombudsman or claim compensation from the Financial Services Compensation Scheme.

In March, UKLI director Baljinder Chohan was banned from being a director of a UK company for four years for involvement in the promotion of another firm.